Bankruptcy law was created by congress to either eliminate debt completely or the opportunity to repay all or some of your debt through a court regulated repayment plan. Bankruptcy law offers people a fresh start.
Types of Bankruptcy Laws
There are two types of bankruptcy available to consumers. These options are Chapter 7 or Chapter 13. In the bankruptcy process blame is not assigned. The bankruptcy laws recognize that sometimes responsible, well intentioned people have insurmountable financial problems. Bankruptcy allows a person to recover from the unrelenting pressure and pressure of their debts.
- Chapter 7 Bankruptcy – Chapter 7 is titled “Fresh Start” in the Bankruptcy Code and is the most common form of bankruptcy. Your goal when filing a Chapter 7 is to be allowed to discharge your unsecured debt and keep your assets. Exemptions are laws which allow you to keep the equity you possess in assets like your house, car, and personal property.
- Chapter 11 Bankruptcy – Chapter 11 bankruptcy is for large entities/businesses such as corporations, partnerships, and individuals that have larger debts and assets that exceed the asset debt ratio set by the strict limitations of Chapter 13. Also unlike Chapter 13, Chapter 11 is much more flexible and provides more options and can suit even cases that do not involve extremely high debt.
- Chapter 13 Bankruptcy – The Bankruptcy Code refers to this as the “wage earner” plan. Commonly, Chapter 13 is referred to as a consolidation of your bills. Simply put, the debtor provides the court with a list of debts and a plan by which the debtor hopes to repay some or all of the debt within a three to five year period. The amount of debt to be repaid is based on a number of different factors.
Bankruptcy and Your Credit
Bankruptcy and credit are inexorably intertwined. Credit is the way most people begin to have trouble with their finances, and in turn, credit is often the way most people remedy their financial problems. The availability of credit and the encompassing pressure to maintain a good credit rating can often prejudice lenders from providing resources for purchasing a home, car, or other large ticket item.
When one is recognized as bankrupt several things happen. By filing bankruptcy you acknowledge that you are unable to pay your debts, and are thereby relieved from having to pay a number of unsecured debts. Unfortunately, this relief comes at a price. Declaring you are unable to pay your debts makes you a credit risk; in that creditors are less likely to extend credit to you when you need it, and if they do they charge extremely high interest rates.
Fortunately one of the most important parts of bankruptcy is the ability to rehabilitate, or restore, your credit rating. By taking a high interest rate credit card and making regular payments on it in the first few years following your bankruptcy, you demonstrate to potential creditors that you are once again willing and able to make payments upon credit. Eventually your credit rating will go up and you can afford to purchase a home, invest, or have credit available when you need it.
Bankruptcy or Debt Consolidation
Debt consolidation refers to the process of taking out one large loan to pay off a group of others. One major benefit of debt consolidation loans is that the new loan is at a lower or fixed interest rate, which saves the borrower considerable money throughout the life of the loan. Also, having one consolidated loan to repay is often less complicated than keeping track of a variety of different debts.
Most debt consolidation involves a secured loan against a valuable asset such as a house. In order to secure the loan amount, a mortgage is taken out against the house which is then used as collateral for the loan. These types of loans are generally at a lower interest rate because repossession of the property is a powerful incentive to repay the loan.
Most people who have extreme credit card debt often find that debt consolidation enables them to pay off their debts at a much lower interest rate than their credit cards offer. Unfortunately, taking a debt consolidation loan is inherently risky, as the borrower’s home can be jeopardized if he or she is unable to pay back the loan the appropriate time-frame. The different areas of bankruptcy offer different types of protection of your assets, so it is advisable to have expert counsel to determine which path is the best for your situation.
Bankruptcy proceedings can be confusing and intimidating to most people. To make the process as easy as possible, you should have a basic understanding of what bankruptcy entails and how it works.
For the most common type of individual bankruptcy, Chapter 7, the first step is to collect information on your assets and liabilities. Once this information is collected, your attorney will prepare and file a petition with the bankruptcy court.
Once your bankruptcy petition has been filed with the court, the filing gives rise to “an automatic stay”. This “automatic stay” is protection from creditors – they cannot call you, sue you, or pursue any collection action against you during the pendency of your case.
After the filing of your case, the bankruptcy court will notify you of your “Section 341” hearing. This is referred to as the “Meeting of Creditors” in the bankruptcy code and is commonly referred to as the “trustee meeting.” You do not appear in front of a judge and rarely, if ever, have to actually appear in court. This meeting is simply an administrative hearing where the trustee will ask you basic questions about yourself and your financial situation. The trustee wants to confirm the answers that you have given in your bankruptcy petition.
Contact an Attorney
The process to restore your credit can be a long one, but for those for those who are willing to work towards the ultimate goal of good credit, a fresh slate can make it a rewarding and worthwhile one in the end.
Understanding the best choice for your situation, including knowing what constitutes fair lending practices, is often difficult without the guidance of someone who has your best interests in mind. The first steps on your road to good credit begin with hiring an experienced bankruptcy attorney who can advise you of your legal rights.